Pair is Fair for HNIs, Brokers

Tata Motors DVR & Tata Motors, Hero Moto & Bajaj Auto, Ranbaxy & Cipla are some leading hot pairs Pair trades are once more becoming the flavour of markets with stocks having run up over the past two months. Such a trade involves buying stock futures from the same sector as the spread or ratio between the two could have breached its average, creating a betting opportunity.  Some of the stocks being paired or having the possibility include Tata Motors DVR and Tata Motors, Hero MotoCorp and Bajaj Auto, Ranbaxy and Cipla, Ambuja Cement and ACC, REC and PFC, according to derivatives analysts. Such risky trades are popular among brokers who run proprietary books and high net worth individuals.  Since September, the Nifty has rallied around 22% from its low — in the calendar year to date the jump is 27% on a closing high and low basis — after the government broke out of a policy deadlock by pushing through power sector reforms, raising diesel prices and allowing FDI in multi-brand retail. This has coincided with a rise in pair trades. The strategy comprises taking opposite positions on stock futures belonging to the same sector. While it's safer than taking a naked buy or sell on a single stock futures contract, it could backfire if a stock in which a long trade is initiated falls and one in which a short is taken rises. Analysts, therefore, advise trading with strict stop losses in place. It could be based on a statistical calculation or simply a view on markets.  A popular instance of a pair trade involves Tata DVR (differential voting rights) and Tata Motors futures contracts. The Tata DVR, which normally trades at 50-60% of Tata Motors contract, traded at 70% of Tata Motors recently and threw an opportunity of pair trade on expectations DVR would fall and Tata Motors would rise. At Friday's close the ratio had narrowed to 60%.  Angel Broking's derivatives head Siddarth Bhamre said he recently initiated apair trade in Cipla-Ranbaxy futures. It consisted of simultaneously selling Cipla (at . 417)and buying Ranbaxy (. 390) as the former had seen a huge build up in long (bullish) positions which could be unwound amid traders' appetite for risk (high beta stocks) rising in sync with the recent market rally. High beta stocks rise or fall more than benchmark indices during a rally or a correction. However, to guard themselves from a likely market correction, traders went long on Ranbaxy futures, which was close to its support price and could, therefore, rise.  "Such trades are becoming popular with stock-picking trend gaining ground," said Bhamre.  Statistically, REC-PFC also has the potential of being paired, said Chetan Jain, derivatives analyst with Anand Rathi Securities. According to him, a trader could initiate a pair with REC at . 238 and PFC at . 197.55, at a ratio of 1.2. The ratio between the two stocks averages 1.12 which has touched 1.2, implying REC has shot up more than PFC and could decline while the latter would rise. To protect oneself from an adverse move, Jain suggests a stop-loss at 1.24.  ram.sahgal@timesgroup.com